Gold Moving on Ukraine Crisis Escalation

"New Ukrainian tensions have seen the gold price rise in trading today as the West remains nervous about further escalation and the possible imposition of more rigorous economic sanctions."

The gold price is being pushed upwards again on the latest destabilization in the largely Russian speaking area of southeastern Ukraine, although it has not risen as far—so far—as some might have envisaged. This is seen as similar patterns developing as those which led to the effective Russian annexation of Crimea. However one of the key elements that was present in Crimea—the heavily ethnic Russian, as opposed to Russian speaking, dominance—is largely missing in eastern Ukraine and there is rather less certainty that the majority would actually want to become a member of the Russian federation. However a semi-autonomous eastern Ukrainian state within the Ukraine might be favoured and also meet Russian strategic worries which seem largely to revolve around the further eastwards expansion of NATO.

Even so, the potential for further escalation remains and until the next phase of the Ukraine crisis plays out, nervousness will rule and gold will likely benefit overall. Other factors which might be expected to move the price downwards, like the apparent slowdown in Chinese gold withdrawals from the Shanghai Gold Exchange over the past month and the falling away of price premiums thereon—although withdrawals still appear to be running higher than they were a year ago—will likely be negated by the latest Ukraine flare-up.

Whether there are Russian troops poised to invade Ukraine or not it is probably unlikely that President Putin—nicknamed Vlad the Invader after the Crimea incursions—would deem it politically wise to permanently annex south eastern Ukraine given the different mix of ethnicities there in comparison with Crimea. But there is the potential that he might send in troops to temporarily protect ethnic Russians, and once in might find it difficult to withdraw.

With some of the more hardline Western European countries calling for much more punitive sanctions to be imposed on Russia, although others are less keen, the potential for economic destabilisation of both the West and Russia remains. However, Russia may have more stomach for absorbing economic hardships than the West, particularly as it sees the Ukraine as a strategic line in the sand which should not be crossed by NATO.

One suspects that ultimately a diplomatic solution will be found—perhaps along the lines of a federal Ukraine made up of semi autonomous regions such as that which Russia has been proposing. Nevertheless, politicians do have a penchant for talking themselves into corners from which there is no easy exit so the crisis could have a few more months to run yet and the gold price may thus remain quite volatile depending on the perceptions in the West of the degrees of tensions and the potential for escalation.